Vail Daily column: Reconsidering the mortgage insurance option

The United States narrowly avoided going over a fiscal cliff. However, the country now appear to be headed towards a financial sequester. Nonetheless, a third round of Quantitative Easing (QE3) is still going full bore, under which the Federal Reserve Board is purchasing roughly $85 million of mortgage backed securities each month. Appraisal management companies are still unregulated, and there is continued speculation over how long relief refinance program set forth by Fannie Mae and Freddie Mac will continue.

Are you thoroughly confused? I am, too, and my vocation is based upon understanding such complex programs and negotiations set for by the U.S. government. There is much economic uncertainty, apprehension and instability throughout the country right now. Such factors have caused me to explore mortgage financing options that have not been on my radar for a long while. Financing with mortgage insurance is one such prime example.

With home values still depressed in many areas, many borrowers simply don’t have the 20 percent equity required to complete a traditional refinance. Mortgage insurance can be used in some such instances to provide the homeowner with a viable option for refinancing.

For example, let’s analyze a proposed rate and term refinance that I see quite regularly in this valley and environment. A typical scenario I see may have a homeowner trying to refinance a mortgage of $400,000, but the home’s value comes in at $450,000. Therefore, the borrower has 11 percent. Given that this is short of 20 percent equity, the borrower would have to obtain some sort of mortgage insurance premium in order to complete the transaction without having to pay down the debt. Or the owner could elect to wait for a bit in the hopes that the property will appreciate and rates will remain in the current historically low range.

Over the past few months, I have started to communicate the numbers and terms of the mortgage insurance options. This is where most borrowers want to walk away, but many are reconsidering after examining the numbers and variables in the midst of economic uncertainty.

Assuming a well qualified borrower and transaction, this borrower could refinance into a mortgage at current historical low interest rate with a monthly mortgage insurance premium factored in at .37 percent or $123 per month. Of course, every scenario is a little different, but this is applicable in the current environment.

The monthly mortgage insurance premium in this case will be automatically eliminated once the debt is paid down to 78 percent of the appraised value of $450,000. That figure is $351,000, and that will occur with normal monthly payments in roughly 70 months. Furthermore, mortgage insurance is tax deductible for the year 2013. Income limitations are in place on the deductibility, and a CPA should be consulted for the exact calculation on the deductions. Knowing the time frame, exact cost and deducibility of the premium of the premium make the scenario easier to analyze.

My hesitancy in waiting for values to rebound is fear that interest rates may have also rebounded during that time period. An increase to the rate may nullify the benefit of the scenario all together. If this is the case, the borrower loses out on the benefit of the lower interest rate which can be financially quite significant even with the mortgage insurance. As referenced in the opening the Fed’s purchasing of $85 million in mortgage backed securities each month. That purchasing accounts for a staggering 89 percent of all mortgage backed securities (Bloomberg.com) purchased on the open markets. When the Fed ceases this buying volume, or inflation starts to tick up, or if stock markets continues to rally, interest rates will go up.

Mortgage insurance premiums can be structured in a number of different ways and means. Each option should be carefully considered with a skilled loan officer to see if the course of action is financially advisable.

William A. DesPortes, of Central Rockies Mortgage Corp., can be reached at 970-845-7000, extension 103, or william@dsmortgage.org.